SNB Maintains Ceiling as European Woes Weigh on Franc

By Zoe Schneeweiss -
Dec 13, 2012

The Swiss central bank pledged to
uphold its 15-month defense of the franc to protect the economy,
with President Thomas Jordan signaling the possibility of
further “substantial” currency interventions.

The Swiss National Bank (SNBN) maintained the currency ceiling at
1.20 francs per euro today and reiterated that it will uphold
the measure “with the utmost determination.” The Zurich-based
central bank also kept its benchmark interest rate at zero
percent, as forecast by all 18 economists in a Bloomberg News
survey, and said consumer prices will continue to drop in 2013.

The SNB’s foreign-currency reserves have surged almost 70
percent over the past year to 424.8 billion francs ($459
billion) at the end of November as policy makers stepped up euro
purchases to curb flows sparked by the region’s debt crisis.
While the franc has weakened 0.8 percent since the European
Central Bank pledged to purchase government bonds in August,
Jordan said today the central bank doesn’t exclude any measure,
when asked about possible negative interest rates.

“Global uncertainty will persist for the foreseeable
future and drive demand for secure investments,” he said at a
briefing in Bern. “As a result, the exchange-rate situation
will remain fragile, despite the calmer environment that has
come about as a result of the measures taken by the ECB. We
cannot exclude the possibility that we will have to intervene
substantially again.”

‘Safe-Haven Flows’

The franc strengthened after the announcement to as high as
1.2088 versus the euro, before trading at 1.2097 at 11:58 a.m.
in Zurich. It was at 92.66 centimes versus the dollar.

European leaders are struggling to contain the region’s
fiscal crisis, which has pushed the economy back into recession
and prompted concerns over a breakup. In Spain, Prime Minister
Mariano Rajoy is resisting a request for a bailout, while Italy
is facing an election early next year after Prime Minister Mario Monti announced his resignation.

“The primary reason for franc strength was safe-haven
flows out of the euro area,” said Raghav Subbarao, a currency
strategist at Barclays Plc in London. “While these tail risks
have gone down, they have not yet disappeared.”

Price Forecasts

The SNB today maintained its growth estimate for this year
of about 1 percent, while forecasting gross domestic product to
increase between 1 percent and 1.5 percent in 2013. Consumer
prices may drop 0.7 percent this year and 0.1 percent in 2013,
before rising 0.4 percent in 2014, it said. In September, the
central bank forecast prices would fall 0.6 percent this year,
followed by an increase of 0.2 percent in 2013.

Jordan called the impact of the franc’s past appreciation
on prices “rather stronger than had originally been expected.”
The economy will probably show a “significant weakening” in
the current quarter, with the franc’s strength weighing on
exports and spending in 2013, he said.

“The downside risks for the Swiss economy remain
considerable,” he said. “Production capacity in Switzerland
will probably remain underutilized in 2013. The rate of
unemployment is likely to rise further.”

The SNB introduced the franc ceiling on Sept. 6, 2011,
after the currency’s surge to near parity with the euro sparked
deflation threats. While the franc breached the ceiling just
once in April, consumer prices prices in November extended the
longest slump in at least four decades.

‘Serious Consequences’

Pressure on the franc eased after Switzerland’s two biggest
banks earlier this month announced plans to implement charges on
some currency holdings. Credit Suisse Group AG and UBS AG (UBSN) said
separately that they will charge financial institutional clients
for cash balances held in francs.

Jordan said liquidity in the franc market remains “high”
and it’s “natural” that banks are taking measures to reduce
their balance sheets. He declined to comment when asked whether
the SNB had encouraged the move.

The SNB has “always clearly said that we don’t rule out
any instruments or measures,” he said, when asked about
negative interest rates. “All possible measures that are
important to pursue our monetary policy are potentially possible
and that includes all those instruments.”

While the Swiss central bank has focused on controlling the
franc, it has also raised concerns about risks in the property
market. The so-called UBS Real Estate Bubble Index entered the
“risk zone” for the first time since 1991 in the third
quarter, partly fueled by record-low interest rates.

Switzerland introduced rules in July to cut mortgage-
lending risks, including measures that will give the government
the discretion to raise capital requirements for banks to target
specific parts of the credit market. The SNB would have to
request activation of the countercyclical capital buffer.

“Momentum in the domestic residential mortgage and real
estate markets remains exceptionally strong,” Jordan said.
“Mortgage lending continues to grow briskly compared to the
economy as a whole,” while “real estate prices, already at a
high level, continued to rise. As a result, risks for financial
stability increased further” over the past months, he said.